Conventional techniques of asset allocation, such as those utilized by many institutional investors, define appropriate asset allocation targets based on the assumptions similar to those proposed by Markowitz (1959), Sharpe (1985), and other scholars of finance and economics. (See Markowitz, Harry M., 1959, Portfolio Selection: Efficient Diversification of Investments, New York: Wiley; and Sharpe, William F, 1985, AAT: Asset Allocation Tools. Redwood City, Calif.: Scientific Press.) Modern portfolio theory proposes that investors seek efficient portfolios with respect to the mean and variance of the probability distribution of portfolio returns for a specific time period. An important underlying assumption of most economic and finance models is that individuals desire to maximize wealth. In practice quadratic programming algorithms identify optimal portfolios by maximizing return for a given level of risk or minimizing risk for a given level of return.
While these assumptions may be reasonable for most institutions and some individuals, the behavior of most individuals approaching retirement reflect preferences with respect to time as well as wealth and risk. In general, individuals have finite lives and value leisure time, the latter reflected by a willingness to accept reduced consumption by foregoing compensation earned from labor so as to enjoy more leisure time. Conventional models of asset allocation and financial planning typically do not adequately address wealth-consumption-and-time tradeoffs. Accordingly, there is a need for asset allocation and financial planning techniques that take into account an individual's preference for time as well as wealth.